ANSWERED: Can You Settle Student Debt?

We are often asked by student debtors whether or not they can settle on their student loan debt. You hear about settling on debt all the time, especially with medical bills, credit cards, and large debts. With that in mind, some students wonder if they can settle their student loan debt. While the answer isn’t quite as cut and dry as most students would like, it is a possibility. That doesn’t mean that it will be easy to accomplish though. Here are some things you will want to know about settling on student loan debt that is in default.

Exhaust All Other Options First

There are lots of options available to debtors who are worried about their student loans being in default. You can look into payment reductions, forbearances, deferment options, income driven repayment plans, and many other options. Typically, before a loan servicer will allow you to settle on your student loan debt they will want you to have exhausted all other options and still have an inability to keep up with your payments. If you haven’t tried the other options, don’t even bother calling trying to talk to them about a settlement. In fact, you can’t even begin to settle until your loans have been turned over to a collection agency.

Understanding Federal Student Loan Settlement Options

With federal student loans, there are basically three different options you have in order to settle with private collection agencies. You may opt to pay the entire amount of the principal of your loan, plus any unpaid interest, but have any added fees waived. This is typically the most expensive settlement option. Another option is to pay the principal balance in full along with half of the interest that is left on your account, while the other half of the interest is forgiven. Finally, another option may be to pay 90 percent of the total balance. The problem is that each of these options requires you to make a large lump sum payment, and many people in default just don’t have this kind of money laying around.

Some Reasons You May Not Be Eligible to Settle

There are some factors that may make you ineligible for a settlement with your student loans. One big problem is known as strategic default, which is actually considered fraud. This is where you default on purpose, just so you can settle for less. This is a way to land yourself in a lot of trouble, so just steer clear of this. You may also be ineligible if you already have a judgment issued that is forcing you to pay what you owe. This is why it’s important to stay on top of things before they get out of hand.

Request a Statement Showing You are Paid in Full

If you do work out an agreement to settle your student loans, you will want to make sure you request a receipt or statement that shows your account is paid in full. This is really important because it will allow you to prove that you settled and do not owe any more money. While we would like to think that everyone is honest and trustworthy, that isn’t the case in the world we live in. Keeping good records is really important because it allows you to clear up any discrepancies that may come up in the future.

How a Student Loan Settlement Can Affect Your Credit

Just because you settle your student loans doesn’t mean your credit will go unscathed. At any rate, you could count yourself lucky since a bankruptcy on student loans would actually hurt your credit score more than a debt settlement. Despite this optimism, since your loans have to be in default and in collections in order to settle, chances are your credit has already taken quite a hit before you even mention the word settlement. Your credit report should reflect that you no longer have a balance after your settlement, but it will also show that it was settled for less than the full amount. Creditors view this as a high risk, so it may affect you when it comes to financial decisions in the future. Settling the debt, however, is a much better alternative to leaving the loans in default.

As you can see, settling on your student loans really should be a last ditch effort. Avoid having your student loans go into default in the first place by making a budget and sticking with it. Make your payments toward your student loans on time each month, and keep track of your balances and interest rates. By staying on top of it, you can really protect and preserve your credit, allowing you to have your best foot forward financially when it comes to future endeavors. If you do, however, find yourself in default, consider whether or not settling on your student loan debt may be a good option for you.

Project CRediT sources data from Wealthy Genius including net worth, earnings, and various wealth statistics.

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